Uruguay: IMF loan only a palliative
The IMF bailout of Uruguay from a crisis precipitated by massive bank withdrawals by Argentinian depositors was the result of a sudden US policy switch. While this intervention may have helped to avert a collapse ‘a la Argentina’, the underlying crisis facing this small Latin American country is far from resolved.
ON Thursday, 25 July, the Uruguayan planning minister and the head of the Central Bank were packing to leave Washington empty-handed. The IMF wasn’t moved. The stand-by credit to Uruguay had been increased to $2.8 billion in March and another $1.5 billion was added in June. To the Fund that seemed more than enough for a country of just three million people, and the urgent Uruguayan request for more money was not meeting with the expected fast reply. With the country in the middle of a deep financial crisis, the international reserves depleted and savings being taken out of the banks in massive amounts, the countdown to default was being made by the hour and not by the day. The negotiators were packed and leaving for the airport, probably thinking of how to better announce the bad news, when they were stopped by a call from the Embassy: ‘Don’t move yet, we just heard from the State department that the White House is considering our case.’
Yes, the White House announced that the US was considering supporting the Uruguayan request for more money from the IMF, but at the same time Treasury Secretary Paul O’Neill told the press that taxpayers’ money shouldn’t go to South America and end up in secret Swiss accounts. The markets couldn’t be more confused and in Montevideo money continued flowing out of the vaults of the banks Friday (26 July) and Monday (29 July). As the authorities were unable to support the value of the local currency, the peso was left to float and this lifted the dollar to double its previous value, scaring the middle classes whose rents, credit cards, cars and mortgages are paid in dollars but who earn in pesos.
Half of the deposits in the banks had been withdrawn since January, the reserves had plunged from $3 billion to $655 million. Uruguayan bonds were downgraded from ‘investment grade’ (which allows retirement funds to hold them as part of their portfolios) to the level of ‘junk paper’ that only speculators would want to trade with. The ‘country risk’, which measures the additional interest that a government has to pay to get credit from the financial markets, jumped to 30%, a credit so expensive that it is unavailable for any practical purposes.
Still without a decision from the IMF, on Monday the government announced that banks would not open Tuesday. And then for the rest of the week. Rumours of ‘argentinisation’ took over the streets and a few stores were looted in the poor sectors of Montevideo.
A call from President Bush to President Batlle restored the calm: not only would the US support the increase of the IMF stand-by allocation, but $1.5 billion from US funds was to be wired immediately as a bridge loan to allow for the banks to reopen on Monday, 5 August, in a bail-out operation of the kind that Bush and O’Neill had promised never to approve.
In relation to population or the GDP, this bail-out doubles the one announced by the IMF for Brazil a few days later. Working at high speed, Parliament met during the weekend to approve a reform of the financial system along the lines suggested by the IMF and the US Treasury: no government funds would be used to bail out private banks (abandoning a practice that was usual in Uruguay since the 1960s), long-term dollar deposits in the state banks would be frozen (but, contrary to Argentina, not forcibly converted to pesos, still generating interest and recoverable in three years) and all banks were forced to have additional reserves equivalent to 100% of any new deposits, so as to restore confidence.
The White House will get its money back soon, since IMF managing director Horst Koehler immediately announced not only the release of the funds previously agreed to Uruguay, but an increase of $500 million in the stand-by credit, plus another $300 million from the World Bank and the Inter-American Development Bank. The public reacted positively. The rhythm of withdrawals decreased. The street violence, which was relatively minor at its peak and widely exaggerated by the international press, ebbed out completely. Paul O’Neill was greeted as a saviour by the government in Montevideo. The state-owned banks (holding 70% of the deposits) survived and cooperative banks, servicing lower-middle-class and poor households and small firms, emerged strengthened, while foreign banks were pressed to bring in money from their headquarters or collapse. Three of the Peirano brothers, heirs to one of the biggest fortunes in the country, were sent to jail for having lent to their own firms the bail-out money that a few months before had saved their own Banco de Montevideo from default. The powerful union of bank workers, threatened with the layoff of thousands of members and the bankruptcy of their retirement system, chose dialogue with the government instead of a strike.
And now... bleed the patient
A happy ending? It is still too early to tell. A collapse ‘a la Argentina’ was avoided, but the underlying crisis is far from solved. Uruguay is in the fourth year of the greatest recession in its history. The crisis in neighbouring Argentina and Brazil will not allow for increased exports to these countries or tourism from them, which amount traditionally to half of the foreign earnings. Confidence in the banks will not easily be restored, and even when it slowly recovers, the huge amount of reserves that have to be kept in the vaults in order to stimulate the return of the money withdrawn and defend the currency against speculative attacks makes it impossible to provide credit to the ‘real’ economy. Devaluation has doubled the local cost of the foreign-denominated debt. Taxes have already been raised to the point where any further increases will only result in less revenue, since taxpayers will be forced into bankruptcy or the informal economy. Small and medium-sized rural and urban entrepreneurs are joining forces with the unions to demand protection to the local economy and credit.
Always an optimist, President Batlle believes that devaluation, combined with the end of foot-and-mouth disease, will boost meat and other agricultural exports, that Europe and the US will open their markets to help a democracy suffering from financial contagion to recover, that politicians will understand the need to reduce government expenditure and vote unpopular budget cuts, thus restoring confidence, allowing for the four commercial banks temporarily closed to avoid collapse and bringing investors back (both foreign as well as local citizens having massively transferred their savings abroad or keeping them ‘in their mattresses’). The pessimist view, which according to the Economist is also that of many IMF hard-liners, is that the money injected by the bail-out might only help investors reduce their losses and it is only a matter of time until the coffers are emptied again. Paradoxically, the ‘transparency’ measures imposed by the Fund, demanding daily publication of the state of the reserves and the country risk index, end up encouraging speculation and reducing confidence instead of strengthening it, while the required ‘sound’ fiscal balance translates as a ‘bleed the patient’ medicine.
The ‘bleeding’ in this case means increased unemployment (and the related desired effect of reducing salaries to improve competitiveness), lowering of social benefits, closing of the public health facilities provided by the University... In a country that proudly displays one of the highest human development indexes in Latin America and one of the more equitable income distribution patterns in the region, 50% of the children are born in households below the poverty line. While exports of high-quality meat are promoted, teachers report of students from rural schools falling sick because their families had to resort to eating grass. NGOs working with the homeless during the cold winter nights find that 70% of their ‘clients’ are ‘new poor’ who had never required assistance before.
How much will the medicine cost?
While international analysts discuss the meaning of the shift in the US policy - from the market fundamentalism of Bush and O’Neill that promised never to bail out countries in difficulties as Clinton so frequently did, to their doing exactly the opposite in the cases of Uruguay and Brazil - the local public is concerned with more down-to-earth questions: Will they ever be able to recover their frozen deposits? Will the properties of the jailed Peirano brothers be enough to pay for the damages of the fraudulent bankruptcy of their banks? Has the peso reached the bottom or will it continue falling? For politicians the question is: what is the hidden price of the US generosity? Is it just a return of the political favour extended to Bush by President Batlle with his cutting diplomatic relations with Cuba and introducing an anti-Cuban resolution at the UN Commission on Human Rights? Is it part of a political plot to kill Mercosur, the regional integration agreement between Argentina, Brazil, Uruguay and Paraguay, and get Uruguay to sign instead a bilateral free trade agreement with the US and the Free Trade Area of the Americas (an initiative started in the 1990s by Bush’s father)?
It is actually difficult to explain why, having been so critical of the sending of money to Swiss accounts, O’Neill made such efforts to save the Uruguayan financial system, based on absolute banking secrecy and unrestricted and untaxed capital flows. A system that grew out of proportion to the needs of the country, basically to capture illegal capital outflows from Argentina and Brazil, as a first step to the transfer of that money to the Cayman islands or Switzerland. Except for some measures to detect money laundering by drug traffickers, no changes in that system have ever been requested by the US, perhaps because the facility with which money oozes out of the neighbouring economies through Uruguay deters those countries from feeling tempted to establish capital controls.
Apart from fiscal and budgetary measures, the only explicit medium-term goal made by the Uruguayan government to secure IMF support is that of promoting privatisations, particularly in the areas of energy and communications and, in a similar ‘neo-liberal’ vein, reducing the role of the state-owned banks in the economy. But the same democratic functioning that once gave Uruguay the nickname of the ‘Switzerland of the Americas’, even before that bore a negative connotation linked to doubtful banking operations, makes it virtually impossible to approve privatisations in Uruguay now. President Batlle is one of the few Latin Americans who still believe in the neoliberal or neoclassical model, but even within his party most of the leaders agree in private with the logic of Argentinian President Duhalde that ‘the model has failed’.
What the alternative is remains largely an unanswered question. Nevertheless, the roughness of the treatment provided to Argentina by O’Neill and the IMF makes it clear that whatever it is, departing from the beaten track will not be an easy option.
Roberto Bissio, an Uruguayan researcher, is coordinator of Social Watch, a network of citizen groups monitoring social policies in 50 countries around the world.